Types of Forex Brokers: Dealing Desk and No Dealing Desk

Firstly, before you choose a forex broker, you have to find out what your choices represent.

You don’t just take a walk inside a restaurant knowing what to order from the start, do you?

Of course, except you have been a frequent customer. Otherwise, the first thing you will typically do is to check out what is in the menu that they have to offer.

The same process applies when you are choosing a broker.

Typically, you will come across two significant types of forex brokers.

The first is the Dealing Desk (DD).

The second type is the No Dealing Desk (NDD).

Another name for Dealing Desk Brokers is Market Makers.

No Dealing Desk Brokers (NDD) can further be broken down into the following:

•    Straight Through Processing (STP)

•    Straight Through Processing + Electronic Communication Network (STP + ECN or ECN + STP)

What the Heck is a Dealing Desk Broker?

Forex brokers that perform their functions through the auspices of DD brokers make returns through spreads and provision of liquidity to their clients. They are also known as “Market Makers”.

Literarily, DD brokers create a market for their customers. What this means is that, in most cases, they take the other side of the trade belonging to their client.

While this might get you thinking there is a conflict of interest here, the truth is, there is none.

DD brokers render both a buy and sell quote, meaning they are filling both sell and buy orders from their clients. They are completely indifferent towards the decisions made by an individual trader.

Since Market Makers are in control of the various price at which orders are filled, it entails they are exposed to minimal risk (if any) to set fixed spreads (we are going to help you understand why this aspect is much better later on).

In addition, the clients of DD brokers do not see the rates of the interbank market. You don’t have to be afraid. There is a stiff competition going on between DD brokers as such that the rates they offers are almost identical, if not the same, in line with the interbank rates.

The art of using a DD broker to trade means the following:

Assuming you met with your DD broker and initiated a EUR/USD buy order for 100,000 units.

To fill you, the first thing your DD broker will do is to look for a matching sell order from among its other existing clients. Alternatively, he may decide to pass on your trade to its liquidity provider – a responsible entity that commits to buying or selling a financial asset.

When DD brokers do this, they reduce risk, considering they can gain from the spreads without taking over the other/opposite side of your trade.

But, if there are no matching orders, then they will have no choice but to take the opposite side of your trade.

Bear in mind that different forex brokers have their different policies regarding risk management. So be sure to check this out with your broker.

No Dealing Desk (NDD) Broker: What is it?

A No Dealing Desk (NDD) broker is the type that does NOT (for any reason) passes the orders of its clients’ through a Dealing Desk.      

It means that brokers of this nature directly link two parties together, and do not take the other side of their clients’ trade.

You can describe NDDs as bridge builders. What they do is build a structure that makes it possible to connect two otherwise impassable or disconnected areas.

One thing with NDDs is that they can charge extremely low commission in the course of trading, or they can slightly increase the spread by putting up a mark-up.

What about an STP broker?

There are brokers that claim to be genuine ECN brokers; however, what they have is a mere Straight Through Processing system (STP).   

Those forex brokers that are in possession of an STP system directly route the orders of their clients to their liquidity providers that operate in the interbank market.

Usually, NDD brokers with STP system have numerous liquidity providers, and each of these providers quotes its ask and bid price.

Let’s assume that your NDD STP broker has up to three different liquidity providers. What they will see up in their system is three different pairs of Bid and Ask prices/quotes.

In that case, their system will start by sorting these Bid and Ask quotes, going from best to the worst. In this example, the best price attainable in the Bid side is 1.4000 (since you want to sell high), and looking at the Ask side, the best price is 1.4001 (since you want to buy low). In the end, the Bid/Ask is now 1.4000/1.4001.

Bear in mind that the above may not necessarily be the quote you will come across on your platform.

Remember your broker isn’t a Santa Claus, nor is he operating a charitable organisation. He didn’t take pleasure in going through all that pain to sort through the quotes for free! You should know that even in Freetown, nothing is free!

Thus, to compensate them for their time and effort, your broker usually adds a small, but fixed, mark-up. Assuming the broker’s policy is to add a mark-up in the range of 1-pip, what you will see on your platform would look like this: 1.3999/1.4002.

You will also see a 3-pip spread. What happens is that the 1-pip spread changes into a 3-pip spread for your comfort.

Therefore, when you make the decision to purchase EUR/USD at 1.4002 for 100,000 units, your order will then be sent through your broker, and from there is routed to liquidity provider A or B, as the case may be.

Assuming your order is acknowledged, a short position of 100,000 units of EUR/USD at 14001 will be the case for either one of the liquidity provider A or B. And when this happens, you will have a long position of 1.4002 EUR/USD for 100,000 units. Finally, your broker will rake in a 1-pip profit.

This change in the bid/ask quote is also one of the reasons why brokers with STP have spread that varies. If there is an expansion in the spread of their liquidity providers, they will have no other choice but to expand their spreads also.

Although there are STP brokers that offer FIXED spreads, the majority of them have VARIABLE spreads.

What is an ECN Broker?

A genuine ECN forex broker is the type of broker that allows the client’s orders to interact freely with orders of other traders/participants in the ECN.

Participants vary from retail traders, banks, hedge funds, and even in some cases, other brokers. In other words, participants engage in trades with or against one another by putting forward their best bids and ask prices.

Another thing ECNs do is to enable their clients to see the very “Depth of the Market.”

A Depth of Market highlights the whereabouts of the buy and sell orders initiated by other participants. Due to the nature of ECN, it is extremely challenging to impose a fixed mark-up; therefore, ECN brokers usually get their compensation through a small commission.

Our next lesson will focus on Dealing Desk versus No Dealing Desk brokers. So stay tuned.

  • BrokerEUR/USD
    Core Spreads 0.6pips (variable) margin: 3.33%
    CMC Markets 0.7pips. (variable) margin: 3.33%
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